CEO Pay and the Fairway Factor

It’s no secret that for many top executives, golf and business are inextricably linked. A four-hour stroll through manicured fairways provides a great opportunity to network or talk deals. Now, a study suggests that golf can offer corporate observers something else as well: insight into the inexact science of CEO compensation.

Both corporate America and professional golf adhere to a principle known as the economic theory of tournaments, says John Martin, chair of finance at Baylor University in Waco, Tex., and author of Golf Tournaments and CEO Pay-Unraveling the Mysteries of Executive Compensation. Simply put, this means the distribution of prize money reflects the order of finish. The idea is to create incentive for everyone in the field.

Clearly, though, motivation to get ahead isn’t uniform. It’s highest at the top of the ladder, where gaps in pay are the widest, Martin points out in his study, which recently appeared in the Journal of Applied Corporate Finance. In golf, he notes, statistics show that “in the final round of play, the tournament leaders improved their score more than did the laggards.” Similarly, CEO contenders should theoretically possess more drive than those in the lower ranks, because they stand the most to gain.

Still, there’s at least one key difference. Proportionately, the disparity in pay between a company’s CEO and its second in command is smaller than that separating the winner of, say, the British Open and the runner-up. The reason, suggests Martin, is simple: After trouncing his nearest competitor down the stretch, Tiger Woods doesn’t have to turn around and work with him the next day.